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<Country>
Issuer of report:
Disclosures & Disclaimer: This report must be
read with the disclosures and the analyst
certifications in the Disclosure appendix, and with
the Disclaimer, which forms part of it
India Strategy
EQUITIES - INDIA 17 Aug 2016
Dimitar Stoyanov
Summer Associate
The Hongkong and Shanghai Banking
Corporation Limited
dimitar.krasimirov.stoyanov@hsbc.com.hk
+852 2822 4297
Contents
Executive summary
• India has the brightest economic outlook in the region but this is already reflected in the current valuations
• The upward momentum is likely to continue for some time but in the long-run the upside potential is limited
• Market sentiment reversal due to disappointing data or any catalyst event could lead to a spike in volatility and selloff
• In order to achieve good performance, focus on specific sectors, catalyst events and consumer behaviour trends
• The sectors which are most likely to perform well are Consumer, Materials, IT and Telecoms
• A strong Monsoon will have a greater positive impact on the companies with high rural exposure than on the ones
with urban exposure
• Medium size companies will benefit most from the Goods and Services Tax Bill and the Monsoon
• BSE SENSEX TP 29750 INR UPSIDE +6% 2
1
• Market structure
2
• Market performance
3
• Market characteristics
4
• Earnings and profitability
5
• Valuations and sentiment
6
• News and risks
7
• Investing in India
8
• Market outlook
Market structure
Underweight on two of the most important sectors for high value added production – IT, Financials
and overweight on Healthcare and Consumer
3
19%
16%
12%
11%
8%
7%
6%
5%
5%
11%
Industry Weights
Software &
Services
Banks
Automobiles &
Components
Pharmaceuticals
Energy
Materials
Food Beverage &
Tobacco
Capital Goods
Source: MSCI
19%
18%
14%
11%
11%
9%
7%
6%3%
Sector Weights
Information Technology
Financials
Consumer Discretionary
Health Care
Consumer Staples
Energy
Materials
Industrials
Telecommunication Services
Utilities
Source: MSCI
Source: Bloomberg
Top 10 listed companies
Ticker Short Name Sector Weight
TCS IN
TATA
CONSULTANCY IT 4.90%
RIL IN RELIANCE INDS Energy 3.00%
ITC IN ITC
Consumer
Staples 2.90%
HDFCB IN HDFC BANK Financials 2.90%
INFO IN INFOSYS IT 2.30%
HDFC IN HOUSING DEV FIN Financials 2.00%
COAL IN COAL INDIA Energy 1.90%
HUVR IN HINDUSTAN UNILEV
Consumer
Staples 1.80%
SUNP IN SUN PHARMA INDU Health Care 1.80%
ONGC IN OIL & NATURAL GAS Energy 1.70%
Market performance
4
0
200
400
600
800
1000
1200
2009 2010 2011 2012 2013 2014 2015 2016
USD Relative performance
MSCI ASIA MSCI INDIA
MSCI BRIC Linear (MSCI INDIA)
Source: Bloomberg
0
300
600
900
1200
1500
1800
2009 2010 2011 2012 2013 2014 2015 2016
USD Large Cap - Small Cap
MSCI India Large Cap MSCI India Small Cap
Source: Bloomberg
0%
10%
20%
30%
40%
50%
60%
70%
2012 2013 2014 2015 *2016
Rural exposure Urban exposure
Rural – Urban performance
Source: HSBC
-20% 30% 80% 130%
Health Care
Consumer Staples
Consumer Discretionary
Information Technology
Financials
Materials
Energy
Industrials
Telecom Services
Utilities
Sector performance
YTD 1 year 5 years
Source: Bloomberg
MSCI India has outperformed MSCI Asia with 49% and MSCI BRIC with 73% over the last five years
Stocks with rural exposure have outperformed stocks with urban exposure with 33% since 2009
but have underperformed in the last years
Market characteristics
5
-50
0
50
100
150
200
250
-0,5
0
0,5
1
1,5
2
2011 2012 2013 2014 2015 2016
Thousands
USDbn
Thousands
Net Fund flows
Net Foreign Equity Investment
Domestic Mutual Fund Flows
Source: Bloomberg
0
1000
2000
3000
4000
5000
2011 2012 2013 2014 2015 2016
INRm Trading volume
Source: Bloomberg
0%
10%
20%
30%
40%
50%
2011 2012 2013 2014 2015 2016
SD Volatility
MSCI India MSCI China
MSCI Asia MSCI Emerging markets
Source: Bloomberg
India has received USD1.3bn from foreign financial institutions in July and USD120bn since 2007
High correlation with S&P and US data, despite the lower exports as % of GDP
Correlations
MSCI India MSCI Asia x JP
S&P 500 0.8 0.69
Oil 0.6 0.77
Gold 0.82 0.82
India GDP 0.83
India PMI 0.44 0.31
India interest rate -0.43 -0.34
China PMI -0.33 -0.14
Earnings and profitability
6
0%
5%
10%
15%
20%
2008 2009 2010 2011 2012 2013 2014 2015
Profitability
ROA ROI ROE Div Yield
Source: Bloomberg
-10 0 10 20 30 40 50
Energy
Materials
Industrials
Consumer disc
Consumer staples
Health care
Financials
Technology
Telecoms
Utilities
India
EPS growth
2016e 2017e
Source: Bloomberg, HSBC
-20%
-10%
0%
10%
20%
30%
40%
ID TS FN EN HC CS IT CD UT MT India
3-month 6-month
Earnings momentum
Source: HSBC Data as of 20/07/16
0%
10%
20%
30%
40%
50%
60%
70%
80%
IT TS HC FN CD ID CS UT EN MT India
EPS revision ratio
Source: HSBC Data as of 20/07/16, 12MTH FWD
Profitability and leverage levels are declining
Materials and Utilities are gaining momentum
Valuations and sentiment
7
INDIA ASIA BRIC
Current 2016E 2017E Current 2016E 2017E Current 2016E 2017E
Valuation Metrics
P/E 22.9 18.1 15.1 12.9 12.9 11.6 13.6 11.9 10.3
P/B 3.1 2.8 2.5 1.4 1.3 1.2 1.5 1.3 1.2
EV/Sales 2.9 2.5 2.2 1.6 1.5 1.4 1.9 1.7 1.6
EV/EBITDA 12.3 11.8 9.9 9.1 9.0 8.1 9.7 8.7 7.6
Div. Yield 1.4 1.6 1.8 2.8 2.7 2.9 2.8 2.6 2.9
Fundamentals
Gross Margin 21.9 27.9
Operating
Margin 13.7 11.6 13.6
Profit Margin 9.6 9.5 10.3
ROA 3.5 3.3 3.7 2.3 1.2 1.2 2.1 0.7 0.8
ROE 14.1 14.3 15.3 11.6 12.6 12.1 11.8 8.6 9.1
Analyst recommendation score
Current 3.7 4.1
Long-term 3.8 4.0
1
3
5
7
сеп.02 сеп.05 сеп.08 сеп.11 сеп.14
P/B ratio
India India Long-term
MSCI EM MSCI ASIA
Source: Bloomberg
5
10
15
20
25
30
сеп.02 сеп.05 сеп.08 сеп.11 сеп.14
P/E ratio
India India Long-term
MSCI EM MSCI Asia
MSCI China 2 per. Mov. Avg. (India)
Source: Bloomberg
India is trading at a significant premium to ASIA and BRIC
Source: Bloomberg
News and Risks
I. News
• A strong monsoon season is expected to boost rural income and consumption
• Goods and Service Tax Bill to encourage investments and lower transaction costs
• Appointment of a new central bank governor and monetary policy
II. Risks
• Weakening of global trade and demand could slowdown the growth rate
• An increase in commodity prices will impact negatively the government deficit
• Increase in inflation rate would decrease the purchasing power of the rural population and its consumption
• Political problems related to the Goods and Service Tax Bill or tensions with Pakistan
• An eventual US interest rate hike would increase the amount of non-performing loans and the debt burden for
companies
• Re-evaluation of earnings growth
8
Investing in India
1. Invest directly
• Open an Portfolio investment scheme (PIS) of the Reserve Bank of India(RBI)
• Open a trading account with Sebi-registered brokerage firm
2. Purchase ADR’s
3. Invest in an ETF with geographic focus India
9
Tax rates
Capital gain Public Private
Shor-term 15% 30%
Long-term 0% 10%
Dividend tax
10%-15% bracket 0%
25%-35% bracket 15%
Indian ETFs
Ticker Name
Size
USDbn
Price
USD
NAV
Prem %
T/O
USDm
INDA US
Index
Ishares India ETF -
INDA
4.1 29.67 0.37 48.1
EPI US
Index
Wisdomtree India -
EPI
1.5 21.55 0.14 51.4
INDY US
Index
Ishares Nifty ETF -
INDY
0.8 29.86 0.23 2.9
SCIF US
Index
Market Vectors India
SC -SCIF
0.2 43.88 -0.39 0.1
PIN US
Equity
Powershares India
Port - PIN
0.4 20.74 0.20 7.2
INP US
Equity
IPATH MSCI -INP 0.2 69.99 0.44 0.6
INDL US
Equity
India Daily Bull -INDL 0.1 59.80 -0.15 1.0
Source: Bloomberg
Market outlook
1. Recommended sectors
 Consumer Discretionary
 Materials
2. Recommended stocks
3. BSE SENSEX
TP 29750 INR Upside: +6%
 Based on
2017 P/E – 18.5
2016 P/E – 20.6 and 18% EPS growth in 2017
10
0%
50%
100%
150%
200%
250%
300%
350%
400%
2011-
03
2012-
01
2012-
11
2013-
09
2014-
07
2015-
05
2016-
03
Google Web searches
Tyres Fertilizers Chemicals
Source: Google Trends
Source: Bloomberg
Top 10 stocks
Ticker Company Sector
Market
cap
USDbn P/E P/B EV/EBITDA
APTY IN
APOLLO
TYRES
Consumer
Disc 1.3 7.9 1.4 4.8
MRF IN MRF
Consumer
Disc 2.3 2.2
SRF IN SRF
Consumer
Disc 1.4 21.5 3.4 11.5
TTCH IN
TATA
CHEMICALS Materials 1.9 16.2 2 9.3
GRASIM
IN
GRASIM
INDS Materials 6.4 18.1 1.7 8.7
OINL IN OIL INDIA Energy 3.3 11.1 1 6.5
HCLT IN HCL TECH IT 17.2 14.9 4.3 11.8
TECHM
IN
TECH
MAHINDRA IT 7.2 14.5 2.8 9.9
IDEA IN
IDEA
CELLULAR Telecom 5.1 14.3 1.4 5.5
BHARTI
IN
BHARTI
AIRTEL Telecom 20.8 25.8 2.2 6.7
Thank you for your attention!
11
Q&A

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India Equity Strategy Presentation (2016) - HSBC

  • 1. <Country> Issuer of report: Disclosures & Disclaimer: This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it India Strategy EQUITIES - INDIA 17 Aug 2016 Dimitar Stoyanov Summer Associate The Hongkong and Shanghai Banking Corporation Limited dimitar.krasimirov.stoyanov@hsbc.com.hk +852 2822 4297
  • 2. Contents Executive summary • India has the brightest economic outlook in the region but this is already reflected in the current valuations • The upward momentum is likely to continue for some time but in the long-run the upside potential is limited • Market sentiment reversal due to disappointing data or any catalyst event could lead to a spike in volatility and selloff • In order to achieve good performance, focus on specific sectors, catalyst events and consumer behaviour trends • The sectors which are most likely to perform well are Consumer, Materials, IT and Telecoms • A strong Monsoon will have a greater positive impact on the companies with high rural exposure than on the ones with urban exposure • Medium size companies will benefit most from the Goods and Services Tax Bill and the Monsoon • BSE SENSEX TP 29750 INR UPSIDE +6% 2 1 • Market structure 2 • Market performance 3 • Market characteristics 4 • Earnings and profitability 5 • Valuations and sentiment 6 • News and risks 7 • Investing in India 8 • Market outlook
  • 3. Market structure Underweight on two of the most important sectors for high value added production – IT, Financials and overweight on Healthcare and Consumer 3 19% 16% 12% 11% 8% 7% 6% 5% 5% 11% Industry Weights Software & Services Banks Automobiles & Components Pharmaceuticals Energy Materials Food Beverage & Tobacco Capital Goods Source: MSCI 19% 18% 14% 11% 11% 9% 7% 6%3% Sector Weights Information Technology Financials Consumer Discretionary Health Care Consumer Staples Energy Materials Industrials Telecommunication Services Utilities Source: MSCI Source: Bloomberg Top 10 listed companies Ticker Short Name Sector Weight TCS IN TATA CONSULTANCY IT 4.90% RIL IN RELIANCE INDS Energy 3.00% ITC IN ITC Consumer Staples 2.90% HDFCB IN HDFC BANK Financials 2.90% INFO IN INFOSYS IT 2.30% HDFC IN HOUSING DEV FIN Financials 2.00% COAL IN COAL INDIA Energy 1.90% HUVR IN HINDUSTAN UNILEV Consumer Staples 1.80% SUNP IN SUN PHARMA INDU Health Care 1.80% ONGC IN OIL & NATURAL GAS Energy 1.70%
  • 4. Market performance 4 0 200 400 600 800 1000 1200 2009 2010 2011 2012 2013 2014 2015 2016 USD Relative performance MSCI ASIA MSCI INDIA MSCI BRIC Linear (MSCI INDIA) Source: Bloomberg 0 300 600 900 1200 1500 1800 2009 2010 2011 2012 2013 2014 2015 2016 USD Large Cap - Small Cap MSCI India Large Cap MSCI India Small Cap Source: Bloomberg 0% 10% 20% 30% 40% 50% 60% 70% 2012 2013 2014 2015 *2016 Rural exposure Urban exposure Rural – Urban performance Source: HSBC -20% 30% 80% 130% Health Care Consumer Staples Consumer Discretionary Information Technology Financials Materials Energy Industrials Telecom Services Utilities Sector performance YTD 1 year 5 years Source: Bloomberg MSCI India has outperformed MSCI Asia with 49% and MSCI BRIC with 73% over the last five years Stocks with rural exposure have outperformed stocks with urban exposure with 33% since 2009 but have underperformed in the last years
  • 5. Market characteristics 5 -50 0 50 100 150 200 250 -0,5 0 0,5 1 1,5 2 2011 2012 2013 2014 2015 2016 Thousands USDbn Thousands Net Fund flows Net Foreign Equity Investment Domestic Mutual Fund Flows Source: Bloomberg 0 1000 2000 3000 4000 5000 2011 2012 2013 2014 2015 2016 INRm Trading volume Source: Bloomberg 0% 10% 20% 30% 40% 50% 2011 2012 2013 2014 2015 2016 SD Volatility MSCI India MSCI China MSCI Asia MSCI Emerging markets Source: Bloomberg India has received USD1.3bn from foreign financial institutions in July and USD120bn since 2007 High correlation with S&P and US data, despite the lower exports as % of GDP Correlations MSCI India MSCI Asia x JP S&P 500 0.8 0.69 Oil 0.6 0.77 Gold 0.82 0.82 India GDP 0.83 India PMI 0.44 0.31 India interest rate -0.43 -0.34 China PMI -0.33 -0.14
  • 6. Earnings and profitability 6 0% 5% 10% 15% 20% 2008 2009 2010 2011 2012 2013 2014 2015 Profitability ROA ROI ROE Div Yield Source: Bloomberg -10 0 10 20 30 40 50 Energy Materials Industrials Consumer disc Consumer staples Health care Financials Technology Telecoms Utilities India EPS growth 2016e 2017e Source: Bloomberg, HSBC -20% -10% 0% 10% 20% 30% 40% ID TS FN EN HC CS IT CD UT MT India 3-month 6-month Earnings momentum Source: HSBC Data as of 20/07/16 0% 10% 20% 30% 40% 50% 60% 70% 80% IT TS HC FN CD ID CS UT EN MT India EPS revision ratio Source: HSBC Data as of 20/07/16, 12MTH FWD Profitability and leverage levels are declining Materials and Utilities are gaining momentum
  • 7. Valuations and sentiment 7 INDIA ASIA BRIC Current 2016E 2017E Current 2016E 2017E Current 2016E 2017E Valuation Metrics P/E 22.9 18.1 15.1 12.9 12.9 11.6 13.6 11.9 10.3 P/B 3.1 2.8 2.5 1.4 1.3 1.2 1.5 1.3 1.2 EV/Sales 2.9 2.5 2.2 1.6 1.5 1.4 1.9 1.7 1.6 EV/EBITDA 12.3 11.8 9.9 9.1 9.0 8.1 9.7 8.7 7.6 Div. Yield 1.4 1.6 1.8 2.8 2.7 2.9 2.8 2.6 2.9 Fundamentals Gross Margin 21.9 27.9 Operating Margin 13.7 11.6 13.6 Profit Margin 9.6 9.5 10.3 ROA 3.5 3.3 3.7 2.3 1.2 1.2 2.1 0.7 0.8 ROE 14.1 14.3 15.3 11.6 12.6 12.1 11.8 8.6 9.1 Analyst recommendation score Current 3.7 4.1 Long-term 3.8 4.0 1 3 5 7 сеп.02 сеп.05 сеп.08 сеп.11 сеп.14 P/B ratio India India Long-term MSCI EM MSCI ASIA Source: Bloomberg 5 10 15 20 25 30 сеп.02 сеп.05 сеп.08 сеп.11 сеп.14 P/E ratio India India Long-term MSCI EM MSCI Asia MSCI China 2 per. Mov. Avg. (India) Source: Bloomberg India is trading at a significant premium to ASIA and BRIC Source: Bloomberg
  • 8. News and Risks I. News • A strong monsoon season is expected to boost rural income and consumption • Goods and Service Tax Bill to encourage investments and lower transaction costs • Appointment of a new central bank governor and monetary policy II. Risks • Weakening of global trade and demand could slowdown the growth rate • An increase in commodity prices will impact negatively the government deficit • Increase in inflation rate would decrease the purchasing power of the rural population and its consumption • Political problems related to the Goods and Service Tax Bill or tensions with Pakistan • An eventual US interest rate hike would increase the amount of non-performing loans and the debt burden for companies • Re-evaluation of earnings growth 8
  • 9. Investing in India 1. Invest directly • Open an Portfolio investment scheme (PIS) of the Reserve Bank of India(RBI) • Open a trading account with Sebi-registered brokerage firm 2. Purchase ADR’s 3. Invest in an ETF with geographic focus India 9 Tax rates Capital gain Public Private Shor-term 15% 30% Long-term 0% 10% Dividend tax 10%-15% bracket 0% 25%-35% bracket 15% Indian ETFs Ticker Name Size USDbn Price USD NAV Prem % T/O USDm INDA US Index Ishares India ETF - INDA 4.1 29.67 0.37 48.1 EPI US Index Wisdomtree India - EPI 1.5 21.55 0.14 51.4 INDY US Index Ishares Nifty ETF - INDY 0.8 29.86 0.23 2.9 SCIF US Index Market Vectors India SC -SCIF 0.2 43.88 -0.39 0.1 PIN US Equity Powershares India Port - PIN 0.4 20.74 0.20 7.2 INP US Equity IPATH MSCI -INP 0.2 69.99 0.44 0.6 INDL US Equity India Daily Bull -INDL 0.1 59.80 -0.15 1.0 Source: Bloomberg
  • 10. Market outlook 1. Recommended sectors  Consumer Discretionary  Materials 2. Recommended stocks 3. BSE SENSEX TP 29750 INR Upside: +6%  Based on 2017 P/E – 18.5 2016 P/E – 20.6 and 18% EPS growth in 2017 10 0% 50% 100% 150% 200% 250% 300% 350% 400% 2011- 03 2012- 01 2012- 11 2013- 09 2014- 07 2015- 05 2016- 03 Google Web searches Tyres Fertilizers Chemicals Source: Google Trends Source: Bloomberg Top 10 stocks Ticker Company Sector Market cap USDbn P/E P/B EV/EBITDA APTY IN APOLLO TYRES Consumer Disc 1.3 7.9 1.4 4.8 MRF IN MRF Consumer Disc 2.3 2.2 SRF IN SRF Consumer Disc 1.4 21.5 3.4 11.5 TTCH IN TATA CHEMICALS Materials 1.9 16.2 2 9.3 GRASIM IN GRASIM INDS Materials 6.4 18.1 1.7 8.7 OINL IN OIL INDIA Energy 3.3 11.1 1 6.5 HCLT IN HCL TECH IT 17.2 14.9 4.3 11.8 TECHM IN TECH MAHINDRA IT 7.2 14.5 2.8 9.9 IDEA IN IDEA CELLULAR Telecom 5.1 14.3 1.4 5.5 BHARTI IN BHARTI AIRTEL Telecom 20.8 25.8 2.2 6.7
  • 11. Thank you for your attention! 11 Q&A